March 03, 2025 – Following a similar pattern as observed in the existing housing market, newly constructed home sales pulled back in January. While elevated mortgage rates may have played a role in the decline, the dip in January was due primarily to harsh weather at the start of the year. With rates declining in recent weeks and the Fed’s preferred inflation gauge slowing down from last year, the housing market could see a bounce back at the beginning of the second quarter. Policy uncertainty and economic worries, however, continue to linger on and begin to take a toll on consumers. CEOs, on the other hand, are a bit more optimistic about the business landscape and their confidence level improved solidly in the first quarter.

New home sales drop as weather weigh on activity: Sales of new single-family homes declined 10.5% on a month-to-month basis and registered a seasonally adjusted annual rate of 657k in January, the lowest level in three months. New home sales were below the consensus expectations of 698k units and dropped 1.1% from the same month of last year. A sizable pull-back in sales activity from the prior month in the Northeast (-20.0%), the Midwest (-16.7%), and the South (-14.8%) suggests that the steep declines were at least partly related to weather, as those regions were slammed by winter storms and chilled by frigid temperatures at the start of the year. The West, on the other hand, experienced an increase of 7.7% despite wildfires in California. Elevated mortgage rates also kept new home sales low, as mortgage rates reached an 8-month in mid-January before trending down in the past six weeks. With rates moderated in February, sales could bounce back in the next monthly report and the rising trend will hopefully continue as the market gears up for the spring homebuying season. Meanwhile, new housing inventory climbed to 9.5 months, a jump from 8.0 months in December and an increase from 8.3 months in January 2024. New for-sale units inched up by 1.4% to 495k and reached the highest level since December 2007.

Fed’s preferred inflation gauge is easing for now: The personal consumption expenditure price index (PCE) – the Fed’s favorite inflation indicator – increased 0.3% on a month-over-month basis in January and was up 2.5% from a year ago, according to the Department of Commerce. Excluding food and energy, the core PCE recorded a 2.6% year-over-year increase, and reached the lowest level since June 2024. Despite the latest decline, inflation remains higher than the pre-pandemic norm and is still well above the Fed’s 2% target rate. In fact, Americans are concerned about tariffs that could potentially drive up inflation, and the latest expectations on price growth from University of Michigan’s Survey of Consumers climbed to the highest level since November 2023. Mortgage rates dipped after the release, nevertheless, with the average 30-year fixed rate mortgage declining 0.5% last Friday. Investors’ concern over the economic impact of the new administration’s trade policy is taking a breather for now. 

Consumers feel less positive about the future: The Conference Board Consumer Confidence Index dropped sharply by 7.0 points to 98.3 and reached an 8-monthly cyclical low in February, as Americans began to grow more anxious about future labor market conditions and the outlook of the economy. The drop was the largest monthly decline since August 2021 and was the third straight monthly dip since the end of last year. The Present Situation Index inched down 3.4 points to 136.5 in February, while the Expectation Index plunged 9.3 points from the prior month to 72.9. The sharp decline resulted in the Expectation index dipping below 80 for the first time since June 2024. Consumers were especially concerned about the inflation outlook and their future employment prospects. Their 12-month average inflation expectations jumped from 5.2% to 6% last month, while pessimism about the job market outlook worsened and reached a 10-month high. Mass layoffs in the federal government sector and tariffs’ worries are likely contributing factors to the deterioration of consumer optimism.  

Business leaders show confident optimism at the start of the year: The confidence levels between business leaders and consumers diverged in the latest report. CEO’s optimism increased from 51 in Q424 to 60 in Q125 and surged to the highest level in three years, according to the Conference Board Measure of CEO Confidence. CEOs were substantially more optimistic about the current economic conditions and their perspective on future outlook also improved. Over half (56%) of CEOs said that economic conditions will improve over the next six months, an increase from 33% reported in Q424. The share of CEOs who expected conditions in their own industries to get worse dropped to 14% from 22% in the last quarter. Seven out of ten (71%) of all CEOs planned to raise wages by 3% or more in the next 12 months, an increase from 63% in Q424. When asked about risks impacting their industries, CEOs still ranked “Cyber” (55%) at the top of the list, followed by “Geopolitical instability (55%), and “legal and regulatory uncertainty” (46%).

Construction spending unexpectedly drops: U.S. construction spending in January dipped from the prior month but remained up mildly from the year-ago level. Total construction outlays fell 0.2% to $2,192.5 billion from $2,196.0 billion for the first month of 2025 but increased 3.3% from $2,122.2 billion in January 2024. The overall outlays came in lower than consensus expectations of 0%, as a decline in residential construction spending by 0.5% last month dragged down the total construction spending. Although private single-family spending continued to expand with an increase of 0.6% in January, both multifamily (-0.7%) and home improvement (-1.5%) eased from the prior month. With new home sales falling and builder confidence pulling back, a slowdown in residential construction spending could continue in the next couple months. 

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